BusinessMinistry report outlines future reduced VAT rates but details still to be
settled

Czech consumers can look forward to having more change in their pockets
after shopping trips if reported plans for the phase in of three levels of
Value Added Tax come true. A preliminary document outlining the changes has
already been drawn up by the finance ministry but still needs to be
approved by the government by the end of the month.

Photo: Filip Jandourek
The proposed three levels of VAT and their rates were reported by the daily
Mladá fronta Dnes on Wednesday. It cited a convergence report on the
economy that has to be regularly dispatched to the European Commission in
Brussels.
The main innovation, according to the report, is a 10 percent reduced rate
of tax on drugs, medicinal needs, books and magazines. The existing 15
percent lower rate of VAT, which applies to food, water, heat, and
transport services, would edge down to 14 percent and current 21 percent
top rate would ease to 20 percent. The Ministry of Finance says the figures
are still provisional and the government has to clear them some time before
the end of April.

There’s little surprise about the principle of the new low rate since it
was one of the flagship proposals of the main coalition party, the Social
Democrats of Prime Minister Bohuslav Sobotka. But the scope of the measure
was still in doubt with Minister of Finance Andrej Babiš uncertain a few
weeks ago whether newspapers and magazines would join books as the main
beneficiaries as well. That question now seems, at least in a preliminary
way, to have been answered. But a battle still seems to be looming over
whether children’s nappies and baby food get the lowest tax treatment as
well.

The phase in the new low reduced VAT rate also still appears to be up in
the air. While the convergence document talks about the changes taking
place from 2016, Prime Minister Sobotka told the paper he saw no reason why
it could not come in as early as January 2015. Dnes says the package of
reduced VAT rates will cost at least 16 billion crowns a year.

Where that money will come from is not immediately clear. The still under
wraps convergence report spells out that no increases in company taxes are
planned over the next three years. Special sectoral taxes on big utilities,
such as telecoms and energy companies, and banks, are not mentioned at all.

The last news of those sectoral taxes were that they were still being held
in reserve by the Social Democrats as a possible earner if the state
coffers seemed to be falling short. But Finance Minister Babiš already
appears to have struck out on his own on this one with the suggestion that
at least one of the victims of such a tax, ČEZ, deliver all its net
profits from last year in an exceptional dividend pay out.

Direct taxes on individuals will undergo some changes, such as the ending
of a special solidarity tax on the rich and the abandonment of the
so-called ‘super gross’ wage for calculating the tax damage. But, these
should not result in tax hikes for any specific section of the population.

Who pays? Well, it looks like the government is banking on the ever more
rosy economic growth predictions coming true with the VAT cuts helping to
boost domestic demand and ease the emphasis on an export led recovery.